Are we in a bear market or in a bull market?

Frankly nobody has been able to answer this question when the market is on! 3 months or 6 months later everybody will tell you that “May 2008 to Oct. 2008” we were in a bear market, however now we are in a bull market. Bear markets present a challenge to all investors. Even the savviest investor who knows that bull markets and bear markets are sheer unavoidable phases feel the hurt of a bear market. It doesn’t matter if you have Rs.10,000 in the market or Rs.1 million, losing money hurts. It is during these declining markets your patience will be tested. If fear sets in, you might consider cashing out on your investment plan completely, which can do more damage than anything else.

It is a serious challenge to know whether in November 2010 the market is in a bull market correction or at the start of a bear market! Not that it matters to the real investor who is in the markets for the long run (and therefore invested in equities)….

Correct Asset Allocation

The key to making it through a bear market without losing sleep comes from the construction of your portfolio and your stomach. Many people think you require luck to make money – be that as it may, discipline of investing through the good times and bad times and proper asset allocation, can be a better goal. You have probably have a portfolio that consists of a number of mutual funds, exchange traded funds, shares, and bonds. Perhaps, this mix of investments is designed to achieve a certain goal. It may be part of a mutual fund to fund retirement or a children’s plan for your child’s education, but whatever its goal, you want to make sure your investments are doing what you intended.

If you have taken the time to create an investment mix that is suitable for your risk tolerance and investment objective, then a bear market shouldn’t concern you. For instance, if you have a few decades before needing the money, and are an aggressive investor, you might be invested completely in shares. There is nothing wrong with that, but you should only be invested this way if you understand, and are comfortable with the fact that with significant gains may come significant losses at times. That is just the nature of investing entirely in shares.

If you find yourself in a situation where you become uncomfortable with the losses in your portfolio – that is a sign that you probably aren’t invested according to your risk tolerance. If your portfolio keeps you and your advisor awake at 3am, you are not well balanced in your portfolio. This commonly happens when investors get overly aggressive in a bull market, and suddenly find themselves turning conservative once losses start to show up on statements. Avoid the temptation to alter your investments based on what the prevailing markets are doing. The worst counter action to investing at 21000 index is bailing out at 14000.

Take Advantage of SIP

Sip is a technique utilized by investors who invest in equity markets from their monthly income. A fixed amount is taken out of each salary monthly, and invested in. Since the same amount is invested on a regular basis, you’re making investment purchases when prices are high, low, and everywhere in-between.

This is an advantage to the average investor because it just means when the market is down, you’ll be buying more shares with that money. The more shares you have, the greater the increase in value when the market recovers. So, think of a bear market as a sale at your favorite store when you can buy things at a discount.

Consider Value Buying / Defensive Shares

Defensive shares refer to generally larger companies that are better suited to withstand a prolonged bear market. These are good shares which are currently out of fashion because nobody wants to buy them! Common traits for defensive shares are companies with strong balance sheets that have been in business for a long time. Smaller and younger companies may not have the financial stability to weather a bear market, so you can minimize the impact of a declining market if you’re concentrated on larger and more stable companies. Examples of such shares are ITC, HUL, Tata Tea, Dabur, Coromandel fertilizer, eid parry, etc.

For a greater list look at the portfolio of value funds like Icici Prudential Discovery fund, Templeton India Growth fund, etc.